Samsung and FCPA: Does the United States Care?

South Korea is in political turmoil. In early December 2016, the country’s National Assembly voted to impeach President Park Geun-hye. The impeachment charges included abuse of power, bribery, infringement of press freedom, and dereliction of presidential duties. Subsequently, the Korean Constitutional Court convened a total of seventeen hearings, ultimately upholding Park’s impeachment. Meanwhile, a team of independent special prosecutors, which was set up in December 2016, launched an intensive probe into whether Park colluded with confidante Choi Soon-sil to strong-arm big corporate bodies to donate to certain foundations under Choi’s control in return for commercial benefits. Those Korean businesses include Samsung.

Many in South Korea jestingly refer to the country as the “Republic of Samsung.” This reference to Samsung as Korea’s representative should come as little surprise given the country’s peculiar economic structure. For several decades, the economy of South Korea has been dominated by family-run conglomerates or chaebol, with the top five chaebols generating approximately two-thirds of Korea’s gross domestic product. Samsung, which now boasts eighty years of continuous operation, tops the list with an annual turnover that amounts to about one-fifth of the country’s GDP. In fact, some go so far as to envisage a Korean Samsung-only life: one can live in a Samsung-constructed apartment with Samsung appliances bought on a Samsung credit card, while watching the Samsung-owned professional baseball or basketball team play on a Samsung smartphone or TV.

What spearheads the Samsung empire in terms of overall size, revenue and global business strategies is Samsung Electronics Corporation (“SEC”), the group’s flagship entity. SEC employs more than 300,000 employees worldwide, and about ninety percent of the electronic giant’s sales are generated overseas. SEC is headed by Lee Jae-Yong, who is Harvard educated and came to the helm when his father Lee Kun-hee, Chairman of SEC, suffered an abrupt heart attack and became incapacitated in 2014.

For the past few years, JY Lee has taken measures to cement his succession. This has included an $8 billion merger of two Samsung affiliates, Samsung C&T and Cheil Industries, in 2015, which enabled JY Lee to assume de facto control of Samsung. The prosecutors allege that Lee paid about $36 million USD in bribes to Choi to force the deal though. Upon receipt of said funds, Choi allegedly mobilized government support to bring the merger to fruition.

Amid these allegations, the independent prosecutorial team questioned JY Lee in face-to-face interrogations. In mid-January 2017, the prosecution applied for an arrest warrant against him, but the reviewing court refused to grant one, citing insufficient evidence. Prosecutors pushed on, and, on February 15, JY Lee was finally arrested and had remained in custody. Since then a court in Seoul issued an arrest warrant on a number of charges including bribery, embezzlement, and concealment of assets overseas. The arrest of Samsung’s heir is unprecedented in the company’s corporate history.

Certain media outlets in Korea have admonished that JY Lee’s arrest will wreak havoc not only on Samsung’s operations but on the country’s overall economy, which could entail dire regulatory consequences, including a possible criminal probe into Samsung by U.S. authorities, under the Foreign Corrupt Practices Act (“FCPA”). However, such concerns are overblown because an FCPA investigation aimed at Samsung is unlikely for the following reasons.

First off, under the FCPA, it is illegal for certain individuals and entities to offer, pay, or promise money, gifts or thing of value to a foreign official with a corrupt purpose that aids or abets the payor in obtaining or retaining business. Such entities consist of issuers (that is, listed companies in the United States) and domestic concerns (that is, business entities incorporated in the United States). In the context of the FCPA, a “foreign official” denotes any officer or employee of a foreign government or any department, agency or instrumentality thereof, including any person acting in an official capacity for or on behalf of any such government, department, agency or instrumentality.

In the case of Samsung, it is neither an issuer nor a domestic entity under U.S. law. It is a foreign issuer and concern (because it is listed and headquartered in South Korea), with apparently no America Depository Receipt issued within any United States jurisdiction. It is, therefore, unclear whether the U.S. Department of Justice (“DOJ”) would attempt to exercise FCPA jurisdiction over Samsung for an alleged bribery which transpired solely on Korean soil.

However, aside from SEC’s corporate status, the electronics titan does have U.S. operations. Would that be enough to trigger the extraterritorial application of the FCPA? By way of example, SEC has fully-owned subsidiaries in the United States while its sales in America account for more than a third of the company’s total global sales.

Even here, it is doubtful that the presence of trading in the U.S. alone would be enough to justify an FCPA investigation into SEC. Besides, there is little evidence to date that the SEC’s parent company was physically present in the United States either directly or through an intermediary, to further a corrupt payment to any Korean official. Accordingly, absent sufficient “minimum contacts” with the United States, there would be no basis for American authorities to assert FCPA jurisdiction over Samsung.

On a separate note, SEC has completed its buyout of U.S. auto parts maker Harman International Industries Inc., which is a listed entity. In relation to this deal, both parties entered into a binding agreement in November 2016, under which SEC was scheduled to take over Harman for the total equity value of approximately $8.0 billion USD. Under the theory of “successor liability,” the DOJ has taken the view that a U.S. concern acquiring a potentially troublesome offshore target would not trigger FCPA action. The SEC-Harman deal, however, is the reverse of this theory fact-wise. Whether the transaction will trigger FCPA scrutiny, therefore, remains to be seen.

The criminal trial of JY Lee began on March 9. It will be interesting to observe how it unfolds and whether Samsung’s good name will remain unscathed by the end of judicial proceedings. In the meantime, it would undoubtedly be a prudent move for the electronics giant to toe the line from top-down when it comes to various compliance issues.

Joseph Cho is a government contract lawyer specializing in the defense industry and was formerly General Counsel at Samsung Thales Co., Ltd. He is currently a SJD candidate at the Seoul National University School of Law.